Introduction
In the globalised world of commerce and trade, it is common to have companies conduct business through a group of companies. A group under this context means two or more enterprises, which directly or indirectly exercise 26% or more voting rights, or appoint more than 50% members of the Boards of directors in the other enterprise, or control the management or affairs of the corporate entity. Groups are a set of entities related to each other by economic dependencies or shared control of entities that carry on business with common objectives. This conduct of interconnected entities raises complex legal challenges when insolvency occurs, not only in respect to the asset distribution but also with respect to the dispute resolution mechanism, including arbitration.
Group Insolvency Under IBC
The Insolvency and Bankruptcy Code (IBC), 2016, deals with the insolvency proceedings of a corporate entity, with the purpose to keeping the distressed entity alive and maximising the value of assets of such entity for the benefit of all the stakeholders. IBC does not explicitly provide for ‘group insolvency’, however, the courts have taken the mechanism of substantive consolidation to bridge the gap. In cases such as Videocon, Era Infrastructure, Amtek, Lanco, Educomp, and Aircel, the courts and tribunals have made efforts to address the issues in group insolvency by allowing assets and liabilities of the group companies to be pooled for Insolvency proceedings.
The need for a framework on group insolvency was recognised, resulting in the constitution of a Working Group on Group Insolvency (WG) and Cross-border Insolvency Rule/Regulation Committee, aimed to facilitate a framework for group insolvency and to analyse the UNCITRAL model law on Enterprise Group Insolvency. Both the Working Group and the Committee have given recommendations for Group insolvency Procedures under IBC. However, these recommendations are not yet incorporated under the Code, and the Group Insolvency is still under the judicial discretion.
IBC and Arbitration
Under the Code, once a resolution plan is approved, any claims, including the arbitration claims, are exhausted. Under section 14, the Code imposes a Moratorium in which a stay is imposed on the institution or continuation of proceedings, including arbitration, against the Corporate Debtor (CD). Therefore, precedence is given to insolvency proceedings over arbitration, as the insolvency proceedings are considered to be in rem, affecting all the stakeholders and not only the parties.
Nevertheless, arbitration in insolvency is allowed in limited circumstances. In cases where the arbitration is beneficial to the CD or the proceedings are by the CD, then the arbitration is allowed. If the claims do not involve the payment by the CD or deplete the debtor’s assets, then the tribunal or court can allow arbitration proceedings. However, this discretion is applied in limited circumstances, as IBC overrides other laws, including arbitration.
Group Insolvency and Arbitration
As Indian Insolvency law does not provide for group insolvency explicitly, the tribunals have occasionally used substantive consolidation or joint CRIP. This consolidation provides centralized control with a single committee of Creditors (CoC) and Resolution Professional (RP), and a unified process for maximization of the value of assets. Once the CRIP is admitted, section 14 of the Code imposes a moratorium staying suits and proceedings against the CD, including arbitration. The Supreme Court has affirmed that arbitration proceedings cannot be continued or commenced against the debtor during the moratorium. This provision of moratorium will also apply the multi-party, cross-entity arbitrations in group insolvency.
Under the Group of Companies (GoC) doctrine, as affirmed in the case of Cox & Kings v. SAP India, the non-signatory companies within a group are to be bound by the arbitration agreement signed by a signatory company. This doctrine is based on mutual intent, consent, and participation in the transaction and not mere corporate affiliation. However, if the affiliate is under the moratorium under IBC, the stay continues over the arbitral proceeding.
Nevertheless, it is a settled principle in law that questions involving insolvency are not arbitrable if they are the core of the dispute. NCLT is the appropriate forum to decide IBC exclusive issues such as adjudication of default, admission of CIRP, distribution of assets, and others. However, the issues not related to the insolvency proceedings can be arbitrable.
The group insolvency under IBC may delay or limit the cross-entity arbitration clauses. In a consolidated or parallel group CIRP under IBC, Section 14 of the Code will stay the arbitration proceedings against each debtor in CIRP, even if a GoC-based or cross-entity clause would otherwise apply to them. Arbitration between non-solvent affiliated and third parties may still continue. If the dispute is contractual and is in pre-admission, arbitration can be allowed. The same has been held in Indus Biotech v. Kotak, wherein the court clarified that a section 7 application, which is not yet admitted, may be referred to arbitration. However, once admitted moratorium limits the arbitration proceedings. So, the timing is vital for cross-entity disputes in group insolvency.
The enforceability of cross-entity arbitration clauses is a challenge in group insolvency under IBC, where priority is given to the creditor interests by the statutory moratorium, overriding arbitration clauses. Thus, while the GoC doctrine expands the scope of arbitration within corporate groups, the admission of group insolvency narrows its enforceability.
Conclusion
The enforceability of cross-entity arbitration clauses is a challenge in group insolvency where several companies of a conglomerate are involved. While the tribunals may consider the functional connections and consent, the enforcement of the arbitration clauses is often stayed by the moratorium under the IBC. This is a critical issue due to IBC prioritisation of creditors’ interests over the contractual obligations. Therefore, drafting group arbitration clauses with explicit terms or risk of insolvency is crucial. In essence, in India, contractual freedom is overridden by creditor protection under IBC, making arbitration clauses vulnerable in group insolvency.
• Sanjay Sethiya is the Founding Partner at Law Square, Advocates & Solicitors.
• Kandukuri Lakshmi Priya is an intern at Law Square and a 4th year student, Alliance University, Bangalore.